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By:  Jeffrey M. Haber In July of this year, we wrote about a fraud action involving the EB-5 Immigrant Investor Program (“EB-5 Program” or “Program”) ( here ). Under the EB-5 Program, investors are eligible for permanent residency status in the U.S. if they make a qualifying investment in a new commercial enterprise in the U.S. that creates a certain number of permanent full-time jobs for qualified U.S. workers. As we often do in our articles, we examine the legal issues involved in the case that we examine. In our July post, we examined the EB-5 Program so that our readers could gain an understanding of the program, as well as the risks of fraud and abuse attendant to the program. We repost that examination of the Program below. The EB-5 Program and The Risk of Fraud In 1990, Congress created the EB-5 Program to stimulate the U.S. economy through job creation and capital investment by foreign investors. The EB-5 Program offers foreign investors and members of their family an opportunity to obtain permanent residence in the United States ( i.e. , obtain a green card) and provides a source of financing for developers to use in, among other things, construction and business projects. The EB-5 Program has been a material source of private investment in the U.S. for many years. According Invest in the USA, the national trade association whose members are EB-5 regional centers, 1 “between 2008 and 2021, the EB-5 program helped generate $37.4 billion in foreign direct investment to create and retain U.S. jobs for Americans, all at no cost to the taxpayer” ( here ).  Despite the benefits of the EB-5 Program, the incidence of fraud and abuse has increased over the years. 2 Typically, where fraud is involved, a company/regional center and its financial backers will solicit EB-5 Program investors with promises of high rates of return. In some cases, the companies/regional centers guarantee that the investment is risk-free.  The Securities and Exchange Commission (“SEC”) has identified a set of common violations of the securities laws arising from the misconduct surrounding the EB-5 Program. These violations include: (a) false or misleading statements in placement memoranda, subscription agreements, advertisements, and sales brochures in violation of Section 10(b)(5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (b) theft or misuse of investor funds in violation of Section 17(a) of the Securities Act of 1933, as amended; and (c) improper solicitation of investors by unregistered broker-dealers in violation of Section 15(a) of the Exchange Act. Due to the incidence of fraud, the SEC has released an investor alert to warn investors about potential scams in EB-5 offerings. 3 The USCIS has also noted that “fraud – in the form of embezzlement, securities violations, investment schemes, and criminal conduct – has plagued the Regional Center program since its inception.” In a letter to then-President Trump, Senator Charles Grassley also noted that the EB-5 Program had “become riddled with fraud and serious vulnerabilities that present real national security concerns,” and strayed materially from its intended purpose of bringing investment to areas that need investment opportunities the most. 4 Given the incidence of fraud and abuse, it is not surprising that the SEC, as well as EB-5 investors, have brought suit against individuals and companies/regional centers, claiming violations of the common law, as well as the federal securities laws. We highlight a few of the many enforcement actions brought by the SEC against EB-5 Program scammers below. In SEC v. Marco A. Ramirez, et al. , the SEC brought fraud charges against a husband and wife in Texas for stealing funds from foreign investors under the guise of an investment opportunity to create U.S. jobs and a path to U.S. residency. The SEC alleged that the couple and three companies they own fraudulently raised at least $5 million from investors by falsely promising that their money would be invested as part of the EB-5 Program. The SEC alleged that instead of investing the money as promised, the couple routinely diverted investor funds to other undisclosed businesses and for their personal use. In at least one instance, they used new investor funds to make Ponzi-like payments to an existing investor. In SEC v. A Chicago Convention Center, et al. , the SEC charged an individual living in Illinois and two companies behind an investment scheme defrauding foreign investors seeking profitable returns and a legal path to U.S. residency through the EB-5 Program. The SEC alleged that Anshoo R. Sethi created A Chicago Convention Center (“ACCC”) and Intercontinental Regional Center Trust of Chicago (“IRCTC”) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China. Sethi and his companies allegedly duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. According to the SEC, investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Program. The SEC alleged that Sethi and his companies spent more than 90 percent of the administrative fees collected from investors despite their promise to return the money to investors if their visa applications were denied. More than $2.5 million of the funds, said the SEC, were directed to Sethi’s personal bank account in Hong Kong. In SEC v. San Francisco Regional Center, LLC, et al. , the SEC brought fraud charges against an Oakland, California-based businessman accused of misusing money he raised from investors through the EB-5 Program intended to create or preserve jobs for U.S. workers. The SEC alleged that Thomas M. Henderson and his company San Francisco Regional Center LLC falsely claimed to foreign investors that their $500,000 investments would help create at least 10 jobs within several distinct EB-5 related businesses he created, including a nursing facility, call centers, and a dairy operation. This would qualify the investors for a potential path to permanent U.S. residency through the EB-5 Program. But according to the SEC, Henderson jeopardized investors’ residency prospects and combined the $100 million he raised from investors into a general fund from which he allegedly misused at least $9.6 million to purchase his home and personal items and improperly fund several personal business projects, such as Bay Area restaurants that were unrelated to the companies he purportedly established to create jobs consistent with EB-5 requirements. According to the SEC, Henderson also improperly used $7.5 million of investor money to pay overseas marketing agents, and he shuffled millions of dollars among the EB-5 businesses to obscure his fraudulent scheme. In SEC v. Seyed Taher Kameli, et al. , the SEC charged a Chicago-based immigration attorney with defrauding investors participating in the EB-5 Program by improperly commingling and misusing a portion of the approximately $88.7 million raised. The SEC alleged that Seyed Taher Kameli and his companies, Chicagoland Foreign Investment Group, LLC and American Enterprise Pioneers, Inc., falsely claimed to at least 226 foreign investors that each of their $500,000 investments would be used to help construct a specific senior living project in the Chicago area or Florida and create at least 10 permanent full-time jobs within that project. This would qualify each investor for a potential path to permanent U.S. residency through the EB-5 Program. According to the SEC, rather than use investor funds solely for the senior living project for which an investor was solicited, Kameli diverted millions of dollars to fund other projects and to make unrelated payments, which was contrary to representations to investors and the requirements of the EB-5 Program. Kameli also allegedly spent a significant portion of investor proceeds for his own benefit, for his brother’s benefit, and for the benefit of companies he owns. SEC. v. Ahmed Yesterday, on November 21, 2023, the SEC announced ( here ) that it charged Nadim Ahmed, a New York-based businessman and his companies, NuRide Transportation Group, LLC (“NuRide”) and NYC Green Transportation Group, LLC (NYC Green”), with making fraudulent misrepresentations in securities offerings to investors seeking permanent residency through the EB-5 Program. The SEC also charged Ahmed and Mehreen Shah a/k/a Mona Shah, a New York-based immigration attorney, and her law firm with offering unregistered securities to investors in offerings that raised more than $66 million from more than 100 investors. A copy of the complaint, which was filed in the United States District Court for the Southern District of New York, can be found here . 5 According to the SEC, from approximately June 2014 through December 2018, Ahmed, NuRide and NYC Green falsely told NYC Green investors that NYC Green would be operated in a manner consistent with the requirements of the EB-5 Program and that NYC Green’s principals had contributed $11 million to the company. Further, Ahmed, NuRide, and NYC Green allegedly put key revenue-generating contracts in NuRide’s name despite telling investors that NYC Green would be the operating transportation business. Ahmed also allegedly used one investor’s funds to pay a portion of a prior settlement between another one of his companies and the SEC. In addition, said the SEC, from June 2014 through November 2022, Ahmed, NuRide, and NYC Green, along with Shah, her law firm, and three other entities associated with Ahmed and/or Shah, allegedly offered or sold unregistered securities, including to individuals residing in the United States, in three offerings, for which no exemption to the registration requirements was available. According to the complaint, none of the investors in the offerings has received unconditional permanent residency status or a return of their investment. Commenting on the allegations in the complaint, Thomas P. Smith, Jr., Associate Regional Director in the New York Regional Office, said “ ll offering materials, including those provided to investors seeking residency under the EB-5 program, must contain accurate disclosures about the securities being issued. And all securities offerings must comply with the registration requirements or the exemptions to those requirements.” The SEC charged Ahmed, NYC Green, and NuRide with violating the antifraud provisions and, along with Shah, her law firm, and three other entities associated with Ahmed and/or Shah, the registration provisions of the federal securities laws. The complaint seeks permanent and conduct-based injunctions, disgorgement, prejudgment interest, and civil penalties. Footnotes Regional centers are businesses that offer investment opportunities under the Program. The fact that a business is designated as a regional center by the U.S. Citizenship and Immigration Services (“USCIS”) does not mean that USCIS, the SEC, or any other government agency has approved the investments offered by the business, or has otherwise expressed a view on the quality of the investment. See Hearing on “Citizenship for Sale: Oversight of the EB-5 Investor Visa Program” before the Senate Committee on the Judiciary on June 19, 2018 ( here ). See Investor Alert: Investment Scams Exploit Immigrant Investor Program (Oct. 9, 2013) ( here ). See Grassley to Trump: You Can Restore Integrity To EB-5 Visa Program (June 8, 2018) ( here ). The case is styled: SEC v. Ahmed, et al. , 23 Civ. 10210 (S.D.N.Y. Nov. 21, 2023). It is important to remember that the complaint is merely an allegation of wrongdoing. Nothing has been proven by the SEC and no findings have been made before a trier of fact ( e.g. , a judge or jury). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Barlow v. Skroupa , 2023 N.Y. Slip Op. 05786 (1st Dept. Nov. 16, 2023) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud claim because the plaintiffs failed to plead fraud with particularity, as required under CPLR § 3016(b), and identify any specific misrepresentations of material fact. We examine Barlow below.  Plaintiffs, who were employees and consultants of Inspire Summits LLC (“Inspire”), doing business as Skytop Strategies (“Skytop”), originally brought the action alleging breach of contract by defendants Skytop and its owner Christopher Skroupa, in addition to other related claims. Following multiple amendments, plaintiffs added parties and causes of action, including, inter alia , fraud in connection with Skytop’s alleged failure to pay its employees and contractors, overcharging participants in its conferences, and related misconduct. More specifically, the fraud claim was based on alleged misrepresentations about Skytop’s revenue, funding, and prospects and defendants’ nondisclosure of Skytop’s financial irregularities. Plaintiffs alleged that defendants misrepresented that they profited only from Skytop’s conferences and not from inducing employees, consultants, and vendors to provide services without payment and that Skytop possessed the financial ability to pay employees, was growing fast, and offered employees rapid growth. Defendants David Katz (“Katz”) and Paula Luff (“Luff”) moved to dismiss all claims pleaded against them pursuant to CPLR § 3211(a)(7). Katz and Luff maintained that plaintiffs failed to allege that these defendants owed any duties to plaintiffs or made any misrepresentations on which plaintiffs reasonably relied and that the allegations otherwise lacked the required particularity for a fraud claim. The motion court granted the motion. The motion court found that plaintiffs engaged in improper group pleading by failing to distinguish among the various defendants regarding which misrepresentations and omissions each defendant made to each plaintiff, when the misrepresentations were made, and where the misrepresentations were made. 1 By pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to a particular defendant, the motion court concluded that plaintiffs deprived defendants of the notice regarding “the material elements of each cause of action” to which defendants were entitled under CPLR § 3013.  The motion court also held that by referring to all defendants together, plaintiffs failed to plead their fraud claim with the particularity required by CPLR § 3016(b). 2 As noted, the First Department affirmed. The Court agreed with the motion court, finding that “plaintiffs failed to plead fraud with particularity as required under CPLR 3016(b).” 3 The Court also found that plaintiffs failed “to identify any specific and material misrepresentation of fact by either Katz or Luff, and offered only general and conclusory allegations that they made “false representations” regarding Skytop’s revenues and its ability to pay wages and benefits.” 4 As a result, concluded the Court, the motion court “properly dismissed claim.” 5 Takeaway To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” 6 The claim must pleaded with particularity. 7 Conclusory allegations will not suffice. 8 Neither will allegations based on information and belief. 9 If “sufficient factual allegations of even a single element are lacking,” then the claim must be dismissed. 10 The requirement that a fraud claim be pleaded with particularity can be found in CPLR § 3016(b). Under CPLR § 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” 11  To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud. Group pleading runs afoul of the particularity requirement. It also violates CPLR § 3013, which requires the pleader to provide the parties notice of the transactions or occurrences intended to be proved together with the material elements of the plaintiff’s cause of action or the defendant’s defense. In Barlow , plaintiffs failed to comply with the foregoing principles. First, plaintiffs violated the group pleading prohibition “ y pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to particular defendant[ ].” In doing so, “plaintiffs deprive defendants of the notice regarding ‘the material elements of each cause of action’ to which defendants” were entitled under CPLR § 3013. By group pleading their fraud claim, the plaintiffs in Barlow also failed to plead their claim with particularity. Courts routinely hold that a complaint, which asserts, in general terms, that all defendants engaged in the alleged misconduct, is insufficiently particular under CPLR § 3016(b). 12 Second, plaintiffs failed to identify any specific misrepresentation of material fact that either Katz or Luff had made to them. Instead, plaintiffs offered only general and conclusory allegations that defendants made “false representations” regarding Skytop’s revenues and its ability to pay wages and benefits. 13 As such, plaintiffs were unable to satisfy the first element of a fraud claim: the making of a misrepresentation or omission of a material fact. Footnotes See Principia Partners LLC v. Swap Fin. Group, LLC , 194 A.D.3d 584, 584 (1st Dept. 2021). El Toro Group, LLC v. Bareburger Group, LLC , 190 A.D.3d 536, 541 (1st Dept. 2021); Total Asset Recovery Servs. LLC v. Metlife, Inc. , 189 A.D.3d 519, 523 (1st Dept. 2020). Slip Op. at a*1 (citation omitted). Id. Id. Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Id. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015). RKA Film Fin., LLC v. Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). See also Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Total Asset Recovery Servs. LLC v. Metlife, Inc. , 189 A.D.3d 519, 523 (1st Dept. 2020). Slip Op. at *1 (citing Principia Partners, 194 A.D.3d at 584). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Today’s Blog article is about usury, a topic that has previously been covered.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .  Society’s disdain for usury was recently articulated by the Court of Appeals in Adar Bays, LLC v. GeneSYS ID, Inc. , 37 N.Y.3d 320 (2021), where the Court stated: Although the ancient laws relating to usury had religious and moral underpinnings, some of which may have carried into New York’s original usury law, the modern conception of our usury laws focuses on the protection of persons in weak bargaining positions from being taken advantage of by those in much stronger bargaining positions. Without doubt, New York’s voiding of usurious contracts can be harsh, perhaps especially in comparison to other states’ laws, but the penalty reflects the legislature’s consistent condemnation of the evils of usury. The forfeiture of interest and capital serves a strong deterrent effect—one the legislature has repeatedly affirmed. Adar Bays, 37 N.Y.3d at 331 (citations and internal quotation marks omitted).  In describing the historical perspectives of New York’s usury laws, the Adar Bays Court, noting “the legislature’s intention to deter loan-sharking,” stated that “ rganized criminal groups built large and highly lucrative money lending businesses in which they charged unconscionable rates of interest such as 250% or even 2000% per year.  Adar Bays, 37 N.Y.3d at 330 and 333. New York’s Penal Law § 190.40 , which sets forth when lenders are guilty of criminal usury in the second degree, a class E felony, provides that: A person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period. See also Roopchand v. Mohammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017). Usurious loans, as a matter of law, are void.  New York’s General Obligations Law § 5-511 ; see also Bakhash v. Winston , 134 A.D.3d 468, 469 (1 st Dep’t 2015) (“The subject note is usurious as a matter of law and, therefore is void.”); Roopchand , 154 A.D.3d at 588 (“A usurious contract is void and relieves the borrower of the obligation to repay principal and interest thereon”); Adar Bays , 37 N.Y.3d at 333 (“loans proven to violate the criminal usury statute are subject to the same consequence as any other usurious loans: complete invalidity of the loan instrument.”).  Further, “where a loan agreement is usurious on its face, usurious intent will be implied and usury will be found as a matter of law.”  Roopchand , 154 A.D.3d at 989; see also Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc. , 105 A.D.3d 178, 183 (1 st Dep’t 2013) (“If usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law.”).  The New York Court of Appeals has explained: Usurious intent, an essential element of usury, which is embodied in the statutory requirement that an unlawful rate of interest be knowingly taken is a question of fact.  It is the prevailing view that where usury does not appear on the face of the note, usury is a question of fact.  It has been properly observed: If the note or bond shows a rate of interest higher than the statutory lawful rate, it would be immaterial whether the lender actually intended to violate the law. His intent would be conclusively presumed. Freitas v. Geddes Savings and Loan Ass’n. , 63 N.Y.2d 254, 262 (1984) (citations, internal quotation marks and brackets omitted). Where the term of a loan is for less than one year the interest rate is annualized with the stated interest rate being for the period of the loan.  Bakhash , 134 A.D.3d at 469.  In this regard, the Bakhash Court stated: It is true that the stated rate on the four-month note is 12%. However, it does not say 12% per annum. Where, as here, the loan is for less than a year, the interest rate is annualized, and thus, the annual rate on the note is 36%, well above the criminal usury rate of 25%. Id ., at 469 (citation omitted). Frequently, courts must first determine whether a transaction is a loan before determining whether usury is applicable.  [Eds. Note: this Blog previously addressed this issue < here =">here"> and < here =">here"> .]  Recently, the Appellate Division, Second Department, in Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC , addressed this issue.  The parties in Crystal Springs “entered into a written merchant agreement pursuant to which the plaintiff agreed to purchase and the … defendants agreed to sell $140,000 of the … defendants’ future receipts for the price of $90,000.”  The defendants defaulted in appearing in an action commenced by the plaintiff for breach of the agreement.  After a default judgment was entered, the defendants moved, inter alia , to vacate the judgment and to dismiss the action based on criminal usury.  The defendants appealed the motion court’s denial of the motion. On appeal, the Second Department reversed, finding that the motion court “should have granted that branch of the defendants’ motion which was to vacate the judgment in the interest of justice on the ground that the agreement constituted a criminally usurious loan.”  The Court noted that a party “is not necessarily required to establish a reasonable excuse in order to be entitled to vacatur in the interest of justice.”  (Citation and internal quotation marks omitted.) In discussing the law on usury, the Court stated that: The rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be. To determine whether a transaction constitutes a usurious loan, it must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it. Unless a principal sum advanced is repayable absolutely, the transaction is not a loan. Usually, courts weigh three factors when determining whether repayment is absolute or contingent: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy. A loan that is criminally usurious is void.  In applying the law to the facts of the case, the Second Department found that the defendants established that the parties’ agreement was criminally usurious and stated: The agreement and addendums thereto provided, among other things, that, in exchange for the purchase, the … defendants were obligated to authorize the plaintiff to automatically debit $4,000 from their bank account each business day, the plaintiff was “under no obligation” to reconcile the payments to a percentage amount of the … defendants’ sales rather than the fixed daily amount, and the plaintiff was entitled to collect the full uncollected purchase amount plus all fees due under the agreement in the event of the … defendants’ default by changing their payment processing arrangements or declaring bankruptcy. Together, these terms established that the agreement was a loan, pursuant to which repayment was absolute, rather than a purchase of future receipts under which repayment was contingent upon the … defendants’ actual sales. The plaintiff does not dispute that the agreement effected an annual interest rate exceeding the criminally usurious threshold of 25% (see Penal Law § 190.40). Accordingly, the Supreme Court should have granted that branch of the defendants’ motion which was to vacate the judgment in the interest of justice on the ground that the agreement constituted a criminally usurious loan.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Document discovery is an integral part of any litigation. Documents form the foundation of discovery plans and strategies, and, more significantly, proof at trial. Consequently, litigants must search for, collect, and preserve their documents, particularly electronically stored information (“ESI”), from the moment they are aware of their involvement, or potential involvement, in a lawsuit ( i.e. , when there is a reasonable anticipation that a lawsuit may be filed). When a person or company withholds, alters, hides, loses, or destroys evidence relevant to the litigation, either intentionally or negligently, it is considered “spoliation” of evidence and can lead to sanctions against the party that is guilty of spoliation including, but not limited to, dismissal of the action, striking a pleading, assessing monetary penalties, or permitting the trier of fact to take a negative inference against the spoliating party. The negative inference at trial can be very damaging to a party because it permits the trier of fact to infer that there was something to hide and the missing evidence is unavailable because it negatively impacted that party’s affirmative case or defense. A party that seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a “culpable state of mind,” and “that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.” 1 Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed. 2 On the other hand, if the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense. The party requesting sanctions for spoliation has the burden of demonstrating that a litigant intentionally or negligently disposed of critical evidence, and fatally compromised the movant’s ability to prove a claim or defense. 3 Under certain circumstances, the failure of a party to institute a litigation hold 4 or to implement any uniform or centralized plan to preserve data or even the various devices used by the key players in the transaction might demonstrate gross negligence, which would gave rise to a rebuttable presumption that the spoliated documents were relevant. 5 Sanctions for discarding items in good faith and pursuant to a company’s normal business practices are inappropriate in the absence of pending litigation or notice of a specific claim. 6 However, where the party failing to preserve evidence is placed on notice of litigation within or before the time period when the requested evidence is subject to automatic destruction, a sanction will be appropriate. 7 In National Convention Servs., LLC v. FB Intl., Inc. , 2023 N.Y. Slip Op. 05692 (1st Dept. Nov. 14, 2023) ( here ), the Appellate Division, First Department examined a spoilation motion in the context of the destruction of documents resulting from circumstances beyond one’s control – in that case, Superstorm Sandy and a flood in the room in which the documents were stored.  The documents at issue were lost or damaged due to two separate floods occurring in NCS’ basement (due to Superstorm Sandy and burst pipes). Also at issue were former employee emails, some of which were lost due to an electrical outage on the server in which they were housed. Defendant sought sanctions due to spoliation. The motion court denied the motion. Defendant appealed. The First Department affirmed.  The Court held that defendant did not demonstrate a culpable state of mind with regard to the lost documents and emails. The Court noted that the documents in question were “wet, soiled, and unrecognizable” due to the effects of Superstorm Sandy, a fact that FB International readily acknowledged. 8 The Court also noted that the emails had been damaged due to a power outage affecting the network server on which the emails were stored. 9 The Court concluded that, based upon these circumstances, and the proof submitted, “defendant was unable to demonstrate a culpable state of mind and relevancy to the claims or defenses at issue.” 10 Footnotes Voom HD Holdings LLC v. Echostar Satellite L.L.C. , 93 A.D.3d 33, 45 (1st Dept. 2012) (quoting Zubulake v. UBS Warburg LLC , 220 F.R.D. 212, 220 (S.D.N.Y. 2003); Pegasus Aviation I, Inc. v. Varig Logistica S.A. , 26 N.Y.3d 543, 547-48 (2015). Zubulake , 220 F.R.D. at 220. Utica Mut. Ins. Co. v. Berkoski Oil Co. , 58 A.D.3d 717, 718 (2d Dept. 2009) (citation and quotation marks omitted); Mendez v. La Guacatala, Inc. , 95 A.D.3d 1084, 1085 (2d Dept. 2012). A litigation hold is a directive to maintain and preserve all documents relevant to a lawsuit or potential lawsuit. Essentially, parties and non-parties are instructed that nothing should be deleted, removed, hidden, modified, or discarded by anyone in anticipation, or during the pendency, of a litigation. E.g. , VOOM HD Holdings , 93 A.D.3d at 45; AJ Holdings Group, LLC v. IP Holdings, LLC , 129 A.D.3d 504, 505 (1st Dept. 2015). See , e.g. , Conderman v Rochester Gas & Elec. Corp. , 262 A.D.2d 1068 (4th Dept. 1999); Gogos v. Modell’s Sporting Goods, Inc. , 87 A.D.3d 248 (1st Dept. 2011)). See Strong v. City of N.Y. , 112 A.D.3d 15 (1st Dept. 2013). Slip Op. at *1. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber It is well-settled that a corporation (or limited liability company) acts through its officers, directors and owners. As a result, these individuals are normally not liable for the debts incurred by the corporation (or limited liability company). However, when an officer, director or shareholder abuses the corporate form to perpetrate a wrong or injustice against a third party, courts will intervene on behalf of the third party to hold the corporate actor personally liable. 1 “The concept of piercing the corporate veil is an exception to general rule.” 2 Courts will invoke this exception only where “necessary to prevent fraud or to achieve equity.” 3 “Generally, a plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” 4 For example, the plaintiff must show that the officer, director or member used the corporation (or company) for his/her personal benefit and the corporation (or company) was nothing more than an “alter ego” or instrumentality of the officer or member. 5 Conclusory allegations of domination and control are insufficient. 6 The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable. Factors to consider in determining whether an individual has abused the corporate form include failure to adhere to corporate formalities, inadequate capitalization, commingling of assets and personal use of corporate funds for personal benefit. 7 No one factor controls the consideration. 8 In addition to the foregoing factors, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of. 9 Notably, courts recognize “that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” 10 In Groth v. Ferrante , 2023 N.Y Slip Op. 05592 (2d Dept. Nov. 8, 2023) ( here ), the Appellate Division, Second Department affirmed the dismissal of veil piercing claims against the individuals of a corporate judgment debtor. Groth arose from a $150,000 loan that plaintiffs extended to defendant Everest Merchant Funding, Inc. (“EMF”) in March 2013. The loan was secured by a note. Richard Ferrante and Stuart Schoeman (together, the “Individual Defendants”), as shareholders of EMF, did not personally guarantee the debt. EMF ultimately defaulted on the note, and in a prior action commenced by plaintiffs against EMF to recover on the note, plaintiffs obtained a default judgment against EMF in the total sum of $235,354.60. In December 2018, plaintiffs commenced an action against EMF, Ferrante, and Schoeman pursuant to CPLR article 52 to, among other things, enforce the judgment entered against EMF. Plaintiffs sought to pierce EMF’s corporate veil and enforce the default judgment against Ferrante and Schoeman personally. Plaintiffs further sought to set aside certain cash transfers by EMF, which were made primarily to pay salaries, on the ground that those transfers were fraudulent conveyances pursuant to Debtor and Creditor Law §§ 273-275. The Individual Defendants moved for summary judgment dismissing the complaint insofar as asserted against them. The motion court granted the motion on the grounds that the transfers of funds by EMF were not without consideration and that plaintiffs’ allegations of fraudulent inducement were not properly before the court, since no cause of action sounding in fraudulent inducement was alleged in the pleadings. On appeal, the Second Department affirmed. The Court found that there were “some corporate formalities were observed” by EMF sufficient to withstand plaintiffs’ veil piercing efforts. 11 For example, said the Court, “EMF filed tax returns and held an annual shareholders’ meeting in 2014” and “had a functioning board of directors” that “plaintiff Stephen F. Groth served on … pursuant to a corporate resolution dated January 6, 2014.” 12 The Court also held plaintiffs’ allegation of commingling of personal and corporate assets insufficient to support veil piercing. The Court found that “Ferrante’s infusion of $70,500 of his personal funds into EMF to increase EMF’s value,” negated the claim that he improperly took corporate funds for his personal benefit. 13 Accordingly, the Court concluded that “the individual defendants established, prima facie, that the circumstances present here do not warrant piercing the corporate veil ….” 14 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Under the Private Securities Litigation Reform Act of 1995 (“PSLRA), a mandatory stay of discovery is imposed “ n any private action arising under” the Securities Act of 1933 (“Securities Act”) “during the pendency of any motion to dismiss.” 15 U.S.C. § 77z-1(b)(1). In Camelot Event Driven Fund v. Morgan Stanley & Co. LLC , 2023 N.Y. Slip Op. 05534 (1st Dept. Nov. 2, 2023) ( here ), the Appellate Division, First Department was asked to determine whether the automatic stay under the PSLRA remains in effect “during the pendency” of an interlocutory appeal from the denial of a motion to dismiss. As discussed below, the Court held that it does not. Plaintiff, Camelot Event Driven Fund (“Camelot”), commenced the action in August 2021, against Defendants for violations of the Securities Act in connection with public offerings of preferred and common stock of ViacomCBS Inc. (“Viacom”) in March 2021. Following proceedings for the appointment of a lead plaintiff, Plaintiffs filed the operative complaint. Thereafter, in December 2021, Defendants and Viacom filed motions to dismiss.  On February 7, 2023, the motion court denied the motion as to Defendants but granted Viacom’s motion. Thereafter, discovery commenced. Five months after the motion court issued its decision, Defendants filed an order to show cause that discovery be stayed pending their appeal of the motion court’s order denying their motions. The motion court denied the motion. In doing so, the motion court concluded that “ nasmuch as Court has already issued a decision with respect to the motion to dismiss, and there is no longer a pending motion to dismiss, it would be contrary to and inconsistent with the express language of the PSLRA for the Court to further stay discovery.” Defendants appealed. On appeal, the First Department unanimously affirmed. As an initial matter, the Court held that the section of the PSLRA relating to the automatic stay of discovery ( i.e. , 15 U.S.C. § 77z-1(b)(1)), “applies to any private action, whether brought in state or federal court” 1 as opposed to subsection (a) of 15 U.S.C. § 77z-1, which “applies only to actions in federal court.” This ruling was significant because an issue was raised by the parties as to whether the stay of discovery under the PSLRA applied in state court proceedings and, therefore, whether the question presented was properly before the Court ( i.e. , whether the automatic stay under the PSLRA remains in effect “during the pendency” of an interlocutory appeal from the denial of a motion to dismiss). 2 Having concluded that 15 U.S.C. § 77z-1(b)(1) applied in state court proceedings, the Court turned its attention to the question presented. In that regard, the Court held that 15 U.S.C. § 77z-1(b)(1) “does not apply to stay discovery pending appeals from denials of motions to dismiss.” Looking at the “plain language” of the statute, the Court held that the stay did not apply to pending appeals: As noted, 15 USC § 77z-1(b)(1) states that discovery shall be stayed “during the pendency of any motion to dismiss.” 3 Thus, its plain language provides for a stay of discovery only while a motion to dismiss is awaiting disposition. Here, because defendants’ motions to dismiss have been decided, the stay no longer applies. They are not entitled to a stay of discovery pending their appeals from the denial of the motions. 4 The Court said that its “determination consistent with the statute’s purpose, which ‘is to prevent abusive, expensive discovery in frivolous lawsuits by postponing discovery until after the Court has sustained the legal sufficiency of the complaint.’” 5 Thus, concluded the Court, “ n a case where the court already has sustained the legal sufficiency of the complaint,” as in Camelot , “this purpose has been served.” 6 Footnotes Slip Op. at *1. Plaintiffs maintained that 15 U.S.C. § 77z-1(b)(1) was a procedural rule that applied only in federal court. Defendants maintained that the plain meaning of the statute mandated the application of the automatic stay in both state and federal court. Id. Id. Id. (quoting In re Salomon Analyst Litig. , 373 F. Supp. 2d 252, 254-255 (S.D.N.Y. 2005) (internal quotation marks and citation omitted); see also In re Lernout & Hauspie Sec. Litig. , 214 F. Supp. 2d 100, 106 (D. Mass. 2000)). Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog has written numerous articles about RPAPL 1304 .  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and the Blog articles linked to therein.  By way of brief background as discussed in prior articles, RPAPL 1304 requires that at least ninety days before commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that offer free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  One purpose of RPAPL 1304 is to enable defaulted borrowers to “benefit from the information provided in the notice and the 90–day period during which the parties could attempt to work out the default without imminent threat of a foreclosure action, in an effort to further the ultimate goal of reducing the number of foreclosures”.  CIT Bank N.A. v. Schiffman , 36 N.Y.3d 550, 555 (2021) (citation and internal quotation marks omitted). The failure of a lender to comply with RPAPL 1304 will result in the dismissal of a foreclosure complaint. S ee, e.g., U.S. Bank N.A. v. Beymer , 161 A.D.3d 543 (1 st Dep’t 2018).  Indeed, “proper service of the notice containing the statutorily mandated content is a condition precedent to the commencement of a foreclosure action.”  U.S. Bank N.A. v. Taormina , 187 A.D.3d 1095, 1096 (2 nd Dep’t 2020) (citations omitted).  When failure to comply with RPAPL 1304 is raised as an affirmative defense, the foreclosing lender must demonstrate its compliance with the statute as part of its prima facie case.  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736, 737 (2 nd Dep’t 2018) (citations omitted).  However, a “defense based on noncompliance with RPAPL 1304 may be raised at any time during the action.”  Nationstar Mortgage, LLC v. Matles , 185 A.D.3d 703, 706 (2 nd Dep’t 2020) (citations and internal quotation marks omitted).  In Wells Fargo Bank, N.A. v. Davidson , 202 A.D.3d 880 (2 nd Dep’t 2022), in reversing a judgment of foreclosure and sale and granting summary judgment to the borrowers, the Court  stated that “ ontrary to the contention, the did not waive their contention that the failed to comply with RPAPL 1304 as a defense based on noncompliance with RPAPL 1304 may be raised at any time prior to the entry of a judgment of foreclosure and sale.”  Davidson , 202 A.D.3d at 882 (citations, internal quotation marks and brackets omitted); see also U.S. Bank Nat. Ass’n v. Zakarin , 208 A.D.3d 1275, 1277 (2 nd Dep’t 2022).  A source of frequent litigation regarding RPAPL 1304 notices centers on the sufficiency of the notice itself.  For example, in Wells Fargo Bank, N.A. v. Yapkowitz , 199 A.D.3d 126 (2 nd Dep’t 2021), the Court, after surveying and analyzing case law on RPAPL 1304, held that the requirements of RPAPL 1304 were not satisfied where a single notice is addressed to more than one borrower because each borrower is entitled to a separate notice in its own envelope addressed to each borrower.  [Eds. Note: this blog wrote about Yapkowitz promptly upon the decision being rendered < here =">here"> .]  The First Department, in U.S. Bank Nat. Ass’n v. Maioriello , 207 A.D.3d 428 (2022), adopted the Second Department’s holding in Yapkowitz when, citing to Yapkowitz , stated that “ laintiff’s mailing of a 90-day notice jointly addressed  to both borrowers did not comply with RPAPL 1304.”  Maioriello , 207 A.D.3d at 428. On October 26, 2023, the Third Department, in Deutsche Bank Nat. Trust Co. v. Zatari , adopted the Second Department’s holding in Yapkowitz regarding jointly addressed RPAPL 1304 notices and, in so doing, stated: As to the merits, contend that failed to properly serve with the requisite 90-day notice of foreclosure inasmuch as the notices needed to be sent to each individually, rather than in the same envelope. RPAPL 1304 requires that "at least <90> days before a lender, an assignee or a mortgage loan servicer commences legal action against the borrower, or borrowers at the property address and any other address of record, including mortgage foreclosure, such lender, assignee or mortgage loan servicer shall give notice to the borrower" (RPAPL 1304 <1> ). Notice must be sent "by registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence that is the subject of the mortgage," and "shall be sent in a separate envelope from any other mailing or notice" (RPAPL 1304 <2> . Proper service of the RPAPL 1304 notice containing the statutorily-mandated content is a condition precedent to the commencement of a foreclosure action and the plaintiff's failure to show strict compliance requires dismissal.  Although this Court has not passed on the issue of whether joint borrowers can receive notice in the same envelope, the First and Second Departments have ( see U.S. Bank N.A. v Maioriello , 207 AD3d 428, 428 <1st dept 2022> ; Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d 126, 133-136 <2d dept 2021> ). Specifically, the Second Department has interpreted the "separate envelope" requirement set forth in RPAPL 1304 (2) to also mean that notices cannot be sent to more than one borrower in the same envelope, and that each borrower should receive separate notices ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 133-136). The First Department has since applied this holding ( see U.S. Bank N.A. v Maioriello , 207 AD3d at 428). As the Second Department noted, the language of RPAPL 1304 (1) is careful to distinguish a borrower, singular, from borrowers, plural ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 134). However, RPAPL 1304 (2), which requires that notices be sent in separate envelopes, only discusses "borrower," singular ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 134; RPAPL 1304 <2> ). In that case, the Court also drew attention to the fact that, although it is possible that whichever borrower reads the notice would alert the other borrower of the mailing, this is not always what occurs ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 135). Accordingly, we now also adopt the holding of the Second Department in Wells Fargo Bank, N.A. Thus, given that the requisite 90-day notices were jointly addressed to both borrowers, did not comply with RPAPL 1304 ( see U.S. Bank N.A. v Maiorello , 207 AD3d at 428; Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 134). As such, given that failed to comply with RPAPL 1304, Supreme Court erred in denying cross-motion for summary judgment dismissing the complaint and granting motion confirming the referee's report and granting the foreclosure and sale of the property.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Melville, NY November 3, 2023 – Freiberger Haber LLP is pleased to announce that co-founding partners, Jonathan H. Freiberger and Jeffrey M. Haber, have been named by Super Lawyers Magazine® to be among the top lawyers in the New York metropolitan area. This is Mr. Freiberger’s fourth, and Mr. Haber’s twelfth, consecutive year of selection. Both Messrs. Freiberger and Haber were recognized for their work in business and commercial litigation. Super Lawyers Magazine® is an affiliate of Thomson Reuters. It recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website. About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, securities, construction, real estate, and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber applies more than 60 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2023 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact Jeffrey M. Haber or Jonathan H. Freiberger Freiberger Haber LLP

By: Jeffrey M. Haber On October 31, 2023, the Appellate Division, First Department, unanimously affirmed the dismissal of a fraudulent inducement claim alleged in connection with the purchase of real property. 829 Greenwich St., LLC v. Slorer , 2023 N.Y. Slip Op. 05458 (Oct. 31, 2023) ( here ). The decision addresses a number of principles this Blog frequently examines, including: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the oral representations supporting the fraudulent inducement claim. 29 Greenwich St., LLC v. Slorer Plaintiff is the assignee of a buyer who contracted with the defendant-sellers to purchase a house located on Greenwich Street. Before signing the contract, the buyer hired a home inspection company to inspect the premises and issue an inspection report. The report pointed to various instances of water damage and possible signs of mold and moisture.  The contract of sale included a disclaimer clause that specifically disclaimed plaintiff’s reliance on seller’s representations about the condition of the house. In pertinent part, the disclaimer clause provided: “Purchaser is entering into this contract based solely upon such inspection and investigation and not upon any information, data, statements or representations, written or oral, as to the physical conditions, state of repair, use, cost of operation or any other matter related to the Premises or the other property included in the sale, given or made by Seller or its representatives, and shall accept the same ‘as is’ in their present condition and state of repair.” Plaintiff and defendants closed the deal and plaintiff took title to the house. After moving into the house, plaintiff allegedly discovered extensive water infiltration and damage.  Plaintiff brought the suit against defendants, claiming defendants fraudulently induced plaintiff to enter and close the contract by misrepresenting the condition of the house. Defendants filed a motion to dismiss the complaint pursuant to CPLR § 3211(a)(1) & (a)(7), claiming the disclaimer clause within the contract barred plaintiff from bringing the suit. The motion court granted the motion. First, said the motion court, the disclaimer clause “directly disclaim plaintiff’s reliance on seller’s representations of the house condition.” Under New York law, “ party claiming fraudulent inducement cannot be said to have justifiably relied on a representation when that very representation is negated by the terms of a contract executed by the allegedly defrauded party.” 1 The motion court explained that the language of the disclaimer unambiguously “preclude seller’s representations, fraudulent or not, from becoming the inducement to buyer’s decision to contract.” Since the parties negotiated the contract “at arm’s length” and “specifically disclaim reliance on any representation by the other party,” the motion court saw “no reason to interfere with the parties’ freedom of contract.” Thus, concluded the motion court, plaintiff’s claims for fraudulent inducement failed. The motion court also rejected plaintiff’s argument that there was an inconsistency between the contract of sale, which contained the disclaimer clause, and the attached rider which did not. The motion court noted that the “rider control only if there inconsistencies between the two.” The motion court found that “there no inconsistency between the disclaimer and the seller’s representations in the rider.” Indeed, said the motion court, “ othing in the rider says that buyer was relying on seller’s representations to make the decision.” “Therefore,” said the motion court, “the disclaimer not superseded by the rider, thus effectively binding the two parties.” Second, the motion court found that the inspection report submitted by plaintiff actually supported defendants’ position that the water damage and mold complained of were not peculiarly within their knowledge. The motion court noted that “the infra-red inspection of the family room ceiling indicate possible signs of moisture and mold, and continuous monitoring of the area warranted.” As such, the motion court concluded that plaintiff was on notice of the water conditions: “The warning should have put plaintiff on alert and may justify a heightened inspection for mold and water damages.” Plaintiff appealed. The Appellate Division, First Department unanimously affirmed. The Court held that the motion court “correctly granted defendants’ motion to dismiss,” finding that plaintiff did not justifiably rely “on any representations regarding no water leaks or mold in the purchaser’s rider.” 2 The Court pointed to the “parties’ contract of sale disclaimed such reliance by stating that plaintiff accepted the house ‘as is,’ based on its own inspection and investigation and not based on any representations by the seller defendants.” 3 Like the motion court, the First Department rejected plaintiff’s argument that there was an inconsistency between the contract and the rider sufficient to escape the effect of the disclaimer: “Although the purchaser’s rider stated that the rider controlled in the event of any inconsistency, there was no such inconsistency, since it was silent as to plaintiff’s right to rely on the representations contained in the rider.” 4 Additionally, noted the Court, “ he contract also stated that acceptance of a deed was deemed full performance of the contract and that the representations did not survive closing.” 5 Moreover, the Court held that the presence of leaks and mold in the house were not facts peculiarly with defendants’ knowledge: “any alleged misrepresentation regarding the lack of leaks and mold in the house ‘did not concern facts peculiarly within the seller knowledge.’” 6 “The inspection report cited by plaintiff noted extensive water damage,” said the Court. 7 Finally, the Court rejected plaintiff’s concealment argument, i.e. , the water damage was external, so that plaintiff was not on notice to look for “undetected interior leaks”. 8   The Court found that, “among other things, “the report noted that the fifth-floor ceiling had ‘significant damage from a roof leak above.’” 9 Since “plaintiff was on notice of water damage, and had access to conduct additional inspections prior to closing,” concluded the Court, such access and ability to conduct additional inspections “vitiate its claim that defendants actively concealed issues.” 10 Takeaway A party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. 11 “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” 12 As discussed, in 829 Greenwich St. , the disclaimer was specific to the matters allegedly misrepresented. An exception to the enforceability of a disclaimer clause is where the defendant has unique or peculiar knowledge of an allegedly misrepresented fact. Under such circumstances, even a specific contractual disclaimer will not defeat a plaintiff’s contention that it reasonably relied on the misrepresentation. In 829 Greenwich St. , the issue of water leaks, water infiltration, and mold were matters identified in the inspection report. In fact, as noted by the Court, the report spoke of “extensive water damage.”In the context of real estate, to satisfy the justifiable reliance element of a fraudulent inducement claim, the purchaser of real property has a duty to inspect the property and satisfy himself/herself as to the bona fides of the transaction. The courts in New York will not hesitate to dismiss a fraud claim by a purchaser of real property where a defective condition exists and was reasonably discovered through an inspection or another form of due diligence. Since the seller has no duty to disclose the pre-existing condition, the seller will be liable only when he/she thwarts or prevents the purchaser from discovering the condition through the exercise of due diligence. As shown in 829 Greenwich St. , plaintiff could not demonstrate justifiable reliance on any alleged misrepresentation. Footnotes Perrotti v. Becker, Glynn, Melamed & Muffly LLP , 82 A.D.3d 495, 495 (1st Dept. 2011). Slip Op. at *1. Id. (citing 116 Waverly Place LLC v. Spruce 116 Waverly LLC , 179 A.D.3d 511, 512 (1st Dept. 2020)). Id. Id. Id. (quoting Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014); and citing 85-87 Pitt St., LLC v. 85-87 Pitt St. Realty Corp. , 83 A.D.3d 446 (1st Dept. 2011)). Id. (citation omitted). Id. Id. Id. Basis Yield , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). Basis Yield , 115 A.D.3d at 137. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In New York, as in other jurisdictions, settlement agreements “are judicially favored, will not lightly be set aside,” and will be enforced “with rigor and without a searching examination into their substance.” 1 A court called upon to enforce a settlement must be satisfied that the agreement is “clear, final and the product of mutual accord.” 2 Thus, an out-of-court agreement settling an action is binding on each party to the agreement only if “it is in a writing subscribed by him or his attorney.” 3 “In addition, since settlement agreements are subject to the principles of contract law, for an enforceable agreement to exist, all material terms must be set forth” in that writing, “and there must be a manifestation of mutual assent.” 4 In Nash v. Walker Mem. Baptist Church, Inc. , 2023 N.Y. Slip Op. 05447 (1st Dept. Oct. 26, 2023) ( here ), the Appellate Division, First Department considered the foregoing principles in connection with a settlement by mediation and the post-mediation emails purporting to reserve certain indemnification rights. Nash arose out of an agreement in which the parties agreed to settle a personal injury action. In that action, plaintiff, Curtis Nash, sought damages after he was injured while working for Rosalyn Yalow Charter School (“Rosalyn”), which had leased a building owned by defendant/third-party plaintiff Walker Memorial Baptist Church, Inc. (“Walker”). Plaintiff sued Walker, alleging that it had been negligent in its duty to maintain the premises; Walker then filed a third-party action against Rosalyn seeking contractual indemnification based on the lease between them. During a virtual mediation session, the parties and their insurance carriers reached an agreement concerning the amounts that would be paid to plaintiff. The agreement also specified that Walker’s insurance carrier, Philadelphia Indemnity Insurance Company (“PIIC”), reserved its rights against nonparty Munich Re Insurance, Rosalyn’s excess liability carrier. The mediator memorialized the terms of the settlement in a post-mediation agreement, which also contained language specifying that each party released the others from all claims or liability arising from the matter. Soon after the mediation session concluded, in response to an email from Munich Re’s counsel, Walker’s counsel confirmed that the settlement resolved all direct claims and third-party claims; the email did not reserve any specific claims. Several other emails among the parties and the court followed, indicating that the matter had been settled. Walker later took the position that PIIC’s request to reserve its rights included the third-party claims against Rosalyn. Thereafter, Rosalyn filed a motion to enforce the settlement, seeking to dismiss the third-party claim against it. The motion court granted the motion. In doing so, the motion court held: Here, Rosalyn established prima facie that the parties had an enforceable settlement agreement by submitting an email from Walker's counsel agreeing to the settlement. The November 23, 2021 email that Walker’s counsel sent only minutes after the mediation confirmed that “all claims” were resolved at the mediation. The email, which reduced the settlement to a writing in accordance with CPLR 2104, was “subscribed” within the meaning of the statute, as the sender was identifiable and there is no contention that Walker’s counsel did not send the email intentionally ( Philadelphia Ins. Indem. Co. , 197 AD3d at 80). The email also contained all material terms, since the sole issue was whether all claims, amongst all parties (to the underlying case), were fully resolved. Walker appealed. The First Department unanimously affirmed. The Court held that the motion court “correctly determined that a binding settlement existed between Walker and Rosalyn and that Walker released its third-party contractual indemnity claim.” 5 In so holding, the Court noted that “ o party dispute that Walker’s counsel had authority to accept the settlement, and that the confirmation email he sent to Munich Re’s counsel came from his email account.” 6 Importantly, said the Court, “ ounsel’s email did not contain any language setting conditions on the settlement or explicitly reserving any specific claims.” 7 The Court found that “the postmediation agreement and confirmatory email from Walker’s counsel contained all material terms, as the only relevant issues were the amounts that would be paid to plaintiff by the parties and their insurance carriers, and whether all claims had been resolved by the settlement agreement.” 8 Finally, the Court held that “objective evidence established that the parties intended to be bound and corroborated the existence and terms of the agreement”: “The emails that followed also indicated that Walker intended to be bound by the agreement reached during the mediation session and did not intend to pursue further litigation against Rosalyn.” 9 See,="See," e.g., =">" here,="here," here,=">here," >here=">here" and="and" >here.=">here."> Takeaway As explained by the Court in Nash , the parties to the mediation fully and completely resolved the dispute. The settlement reflected the parties’ intention that all claims between them were fully resolved. Counsel confirmed the settlement immediately after the mediation and did not give any indication that any rights were being reserved. The only reservation of rights concerned non-parties PIIC and Munich Re. Under these circumstances, the settlement was held to be binding and enforceable.  Footnotes Forcelli v. Gelco Corp. , 109 A.D.3d 244, 247-248 (2d Dept. 2013) (internal quotation marks omitted). Id. CPLR § 2014. Forcelli , 109 A.D.3d at 248 (internal quotation marks omitted). Slip Op. at *1. Id. Id. (citing Philadelphia Ins. Indem. Co. v. Kendall , 197 A.D.3d 75, 80 (1st Dept. 2021)). Id. (citing Rawald v. Dormitory Auth. of the State of N.Y , 199 A.D.3d 477, 477 (1st Dept. 2021). See also Forcelli v. Gelco Corp. , 109 A.D.3d 244, 249 (2d Dept. 2013) (Correspondence between the parties or counsel “can qualify as an enforceable stipulation of settlement under CPLR 2104,” so long as that correspondence “set forth the material terms of the stipulation” and is a properly subscribed ( i.e. , signed) in writing). Id. (citing Flores v. Lower E. Side Serv. Ctr., Inc. , 4 N.Y.3d 363, 369 (2005). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Once an attorney appears in an action on behalf of a client and becomes the attorney of record, the client is free to change counsel by filing with the clerk, a substitution of counsel stipulation, which must also be served on “the attorneys for all parties in the action or, if a party appears without an attorney, to the party.”  CPLR 321 (b)(1).   Additionally, an attorney of record “may withdraw or be changed by order of the court in which the action is pending, upon motion on such notice to the client of the withdrawing attorney, to the attorneys of all other parties in the action or, if a party appears without an attorney, to the party, and to any other person, as the court may direct.”  CPLR 321(b)(2).   What happens, however, when a litigant’s attorney must be replaced due to “death, removal or disability”?  This question is answered by CPLR 321(c), which provides: If an attorney dies, becomes physically or mentally incapacitated, or is removed, suspended or otherwise becomes disabled at any time before judgment, no further proceeding shall be taken in the action against the party for whom he appeared, without leave of the court, until thirty days after notice to appoint another attorney has been served upon that party either personally or in such manner as the court directs. CPLR 321(c) “protects client by automatically staying action from the date of the disabling event.”  Wells Fargo Bank, N.A. v. Kurian , 197 A.D.3d 173, 176 (2 nd Dep’t 2021) (citations omitted).  “The obvious purpose of the stay is to vest the party who has lost counsel with a reasonable opportunity to obtain new counsel before further proceedings are taken and thereby avoid prejudice that might conceivably arise from the absence of counsel in the interim.” Id .  (Citations omitted.) “During the stay imposed by CPLR 321(c), no proceedings against the party will have any adverse effect.”  JPMorgan Chase Bank, Nat. Ass’n v. Simonsen , 208 A.D.3d 1167, 1169 (2 nd Dep’t 2022) (citations, internal quotation marks and brackets omitted).  It is up to opposing counsel to “bring the stay to an end by serving a notice on the affected party to appoint new counsel within 30 days.”  Id .   The protections of CPLR 321(c) can be waived by appearing pro se or by retaining “a new counsel who formally appears in the action.”  Id .  Counsel for the defendant in Kurian , supra , was suspended from the practice of law during the pendency of a mortgage foreclosure litigation, which triggered the stay provisions of CPLR 321(c).  One year later, the plaintiff moved for summary judgment but did not first serve a notice to appoint new counsel pursuant to CPLR 321(c) – perhaps not knowing of the suspension.  New counsel appeared and opposed the motion and cross-moved to dismiss the complaint and the court considered those papers.  The motion court granted plaintiff’s motion and denied defendant’s cross-motion.  Defendant’s pro-se appeal from this order was never perfected. Thereafter, plaintiff’s unopposed motion for a judgment of foreclosure and sale was granted.  Subsequently, defendant’s third counsel moved by order to show cause to stay the sale because “on the date that the plaintiff filed its initial motion, inter alia, for summary judgment and for an order of reference, the motion was invalid, and any orders predicated upon those papers were null and void.”   The motion was denied, and the defendant appealed. In affirming the motion court, the Second Department in Kurian recognized that the “appeal presents a simple issue involving the straightforward provisions of CPLR 321(c), but in a factual posture that is of first impression in the Second Department.”  Kurian , 197 A.D.3d at 174.  The Court found that the defendant waived her right to make an argument under CPLR 321(c) and stated: Therefore, we hold that even in the absence of service of a notice to appoint new counsel upon the unrepresented party as procedurally required by CPLR 321(c), a continuing stay under the statute may be waived by the unrepresented party's affirmative conduct of retaining new counsel, effective as of the time that new counsel formally appears in an action. Here, since the defendant's waiver of the stay occurred before her opposition papers were due in response to the plaintiff's motion, inter alia, for summary judgment and for an order of reference, the fact that the plaintiff filed its motion on an earlier date, when the stay was still in effect, is of no moment. Further, in regards to the suspension of the original attorney of record, the defendant's opposition papers and cross motion did not include any argument, at that time, that the motion before the Supreme Court violated the stay provisions of CPLR 321(c), further bolstering our conclusion that any issue regarding the existence of a stay had been waived. Kurian , 197 A.D.3d at 174. The Second Department addressed CPLR 321(c) on October 25, 2023, in Desiderio v. Wilgosz .   The plaintiff in Desiderio commenced an action alleging that he performed work for the defendants and was not paid.  A clerk’s judgment was entered upon defendant’s failure to answer the complaint.  “Thereafter, the plaintiff filed separate motions seeking to compel the turnover of certain funds, to compel to comply with a subpoena and for sanctions against , to hold in contempt, and to enforce the … judgment.”  The motion court granted the defendant’s motion to vacate the judgment pursuant to CPLR 5105 (a).  Defendant retained a lawyer who appeared and interposed an answer, but was later suspended from the practice of law.  The motion court denied plaintiff’s motions related to the enforcement of the judgment and granted the defendant’s motion to vacate the judgment. On the plaintiff’s appeal, the Second Department affirmed but on different grounds based on CPLR 321(c), and stated: Here, the defendants' attorney was suspended from the practice of law effective May 18, 2020. Thereafter, the defendants were not served with a notice to appoint another attorney, and the Supreme Court did not grant leave to resume the proceedings. Since another attorney did not appear on behalf of the defendants until September 24, 2020, an automatic stay was in place when the judgment was entered on July 13, 2020. Contrary to the plaintiff's contention, even assuming that the defendants improperly raised this issue for the first time in their reply papers, they properly raised this issue on appeal. Accordingly, the court properly granted the defendants' motion to vacate the … judgment.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. 1 In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. 2 Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. 3 Since arbitration is a “creature of contract”, 4 only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. 5 Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” 6 Like all rules, there are exceptions, such as incorporation by reference, assumption, agency, veil-piercing/alter ego and estoppel. 7 In Gilat v. Sutton , 2023 N.Y. Slip Op. 05363 (1st Dept. Oct. 24, 2023) ( here ), the exception at issue was the “direct benefits theory of estoppel.” Under this theory, “a nonsignatory may be compelled to arbitrate where the nonsignatory ‘knowingly exploits’ the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement.” 8 Where “the benefits are merely ‘indirect,’ a nonsignatory cannot be compelled to arbitrate a claim.” 9 “A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself.” 10 Gilat involved a claim that defendants interfered with plaintiff’s rights in a partnership and company that she obtained from her deceased husband, most notably not paying her or the subject company any distributions. In 2015, plaintiff’s husband passed while owning a 100% interest in Rosh, Inc. (“Rosh”) and an 8% interest in 44-45 Realty Associates, L.P. (“Partnership”). 44 G.P. LLC (“LLC”) is allegedly the general partner and owns 20% of the Partnership. Rosh allegedly owns 10% of the LLC. Thus, plaintiff alleged that she owned 8% of the Partnership directly and another 2% vis-à-vis her interest through Rosh. Plaintiff sued defendants, asserting fourteen causes of action in her complaint. In essence, plaintiff maintained that defendants were depriving her of her rights, including the right to receive distributions from her ownership of the Partnership and LLC. Defendants moved to compel arbitration pursuant to CPLR 7503. Defendants maintained that the partnership agreement that plaintiff’s husband signed (the “Partnership Agreement”) contained an arbitration provision requiring “ ny dispute or controversy arising out of or relating to agreement be determined and settled by arbitration.” The LLC operating agreement did not, however contain such a provision. Plaintiff argued that she could not be compelled to arbitrate because defendants could not simultaneously claim she was not a partner while enforcing the Partnership Agreement against her.  The motion court rejected plaintiff’s contention, finding that it was “at odds with first cause of action for breach of the Partnership Agreement and fourteenth cause of action for a declaration that she is a partner, which necessarily implicates the Partnership Agreement.” The motion court also noted that plaintiff did not challenge that her husband had entered the Partnership Agreement and that she sought to enforce rights under that agreement. Thus, the motion court granted the motion. Rosh appealed. The Appellate Division, First Department unanimously reversed. The Court held that “ he court should have denied the motion to compel arbitration of Rosh’s claims because Rosh a nonsignatory to the agreement that contain the arbitration clause.” 11 The Court found that defendants “failed to show that the direct benefits theory of estoppel applie .” 12 The Court noted that the arbitration clause was contained in the Partnership Agreement to which Rosh was not a party and not a partner in the Partnership. 13 “Rather,” said the Court, “Rosh was a ten percent owner in a limited liability company that was the general partner of the partnership. This did not constitute a direct benefit to Rosh from the partnership agreement.” 14 Finally, said the Court, “before Rosh could be compelled to arbitrate, it had to invoke or attempt to enforce the terms of the partnership agreement.” 15 “The Court found, however, that “all of Rosh’s claims were asserted under the operating agreement of the limited liability company or based on its status as a member of that company.” 16 Takeaway Although State policy favors arbitration, a party cannot be required to submit to arbitration any dispute that he/she has not agreed to submit. For this reason, courts are “wary of imposing a contractual obligation to arbitrate on a non-contracting party.” 17 Notwithstanding, where a non-party knowingly exploits and directly receives a benefit from an agreement containing an arbitration clause, the courts will compel the non-signatory to arbitrate any disputes flowing from the agreement. In Gilat , defendants were unable to demonstrate that the direct benefits theory of estoppel applied to Rosh. As noted by the Court, being a non-signatory to the Partnership Agreement and minority owner of the Partnership did not suffice to trigger the theory. Footnotes Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id. at 49-50. (citations omitted). Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001). TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). Merrill Lynch Inv. Managers v. Opibase, Ltd. , 337 F.3d 125, 129 (2d Cir. 2003). Belzberg v. Verus Inv. Holdings Inc. , 21 N.Y.3d 626, 631 (2013) (adopting the doctrine from federal law and citing federal cases). Id. Id. (citations omitted). Slip Op. at *1. Id. (citing Belzberg , 21 N.Y.3d at 631)). Id. Id. (citations omitted). Id. (citing Oxbow Calcining USA Inc. v. American Indus. Partners , 96 A.D.3d 646, 649-650 (1st Dept. 2012)). Id. Smith/Enron Cogeneration Ltd. P’ship, Inc. v. Smith Cogeneration Int’l, Inc. , 198 F.3d 88, 97 (2d Cir. 1999). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes and is not intended to be and should not be taken as legal advice.